Seven midsized credit unions have filed a negligence and breach of fiduciary duty suit in Los Angeles County Superior Court against officers and directors they say were responsible for the failure of the $18 billion Western Corporate Federal Credit Union.
Plaintiffs include three California credit unions: the $35 million 1st Valley Credit Union, the $338 million Glendale Area Schools Federal Credit Union and the $75 million Tulare County Federal Credit Union. Other plaintiffs were the $57 million Stamford Federal Credit Union of Stamford, Conn.; the $56 million KaiPerm Northwest Federal Credit Union of Portland, Ore.; the $256 million Cascade Federal Credit Union, Kent, Wash.; and the $119 million Northwest Plus Credit Union, Everett, Wash.
The suit addresses WesCorp's 2008 and early 2009 investment losses, which depleted $1.25 billion in member capital upon its March 2009 NCUA conservatorship. As of Oct. 31, 2009, WesCorp posted a $4.6 billion retained deficit and another $4.6 billion in other comprehensive losses.
The suit, filed Nov. 24, charges that officer and volunteer defendants began to change WesCorp's investment focus in or around 2003, when the corporate invested in more mortgage- and asset-backed securities, particularly subprime, alt-A and option ARM collateralized instruments.
That “irresponsibly risky” investment program abandoned the “mission, purpose and goals of the credit union system,” plaintiffs claim. Furthermore, defendants failed to recognize economic conditions and take steps to protect assets, instead reassuring members that “finances were sound” and that “WesCorp's 2008 financial performance would be its best year ever.”
The strategy put WesCorp “on a course that focused far more on obtaining higher rates of return on principal than on the preservation and return of the principal itself.”
Another example of alleged negligence and breach of fiduciary duty named in the suit was WesCorp's borrowing up to $10 billion “from nonmember sources” in short-term instruments with maturities of 90 days or less. Those funds were then invested into longer term, risky mortgage-backed securities in an attempt to maximize revenue “at the risk of safety, liquidity, appropriate risk management and common prudence,” court documents state.
“Instead of WesCorp providing liquidity to its retail members as intended,” retail credit unions are now providing liquidity to WesCorp, the suit states.
Defendants include the seized institution's entire board of directors and supervisory committee, which held volunteer positions at the time of WesCorp's conservatorship, as well as two volunteers who had already left the board.
Robert H. Harvey Jr., James P. Jordan, Timothy Kramer, Adam Denbo, Diana R. Dykstra, Wayne Hope, Robin J. Lentz, Susanne Longson, John M. Merlo, Warren Nakamura, Brian Osberg, David Roughton, Darren Williams and Donna Bland were all volunteers dismissed by the NCUA when WesCorp was placed into conservatorship in March 2009.
Also listed as defendants in the suit are Gordon Dames and William Cheney, who were elected to serve three-year terms on the WesCorp board in 2005. Cheney resigned his position when he was hired as CEO of the California Credit Union League in 2006, while Dames served out his term through May 2008.
Other defendants include dismissed executives Robert Siravo and Robert Burrell, as well as current and former WesCorp employees James Hayes, Jeremy Calva, Laura Cloherty, Jeff Hamilton, Dwight Johnston, Timothy Sidley and David Trinder.
The suit also accuses the Stamford, Conn.-based valuation firm RiskSpan of gross negligence in “executing its seriously flawed economic models” and painting “a falsely positive picture” of WesCorp investments.
Stuart Perlitsh, CEO of Glendale Area Schools Federal Credit Union, said his board of directors voted to recover its $1.24 million in capital losses because members deserve accountability from those responsible.
WesCorp's losses weren't merely due to bad luck or a market bubble burst nobody saw coming, Perlitsh said. Rather, the defendants invested a far greater percentage of the corporate's assets in nonagency mortgage-backed securities than did volunteers and officers at other corporates. He called their actions “reckless” and “unreasonably leveraged.”
“WesCorp did not borrow $10 million for natural person credit union liquidity,” Perlitsh said. “They borrowed $10 billion to play investment banker on Wall Street.” The CEO said his credit union maintained a WesCorp account “exclusively for settlement purposes,” and did not benefit from WesCorp's profitable yields when times were good.
“We were winding down when WesCorp went kaput,” Perlitsh said. “We went direct to the Federal Reserve in April of 2007 for Check 21, and we have been moving other services like Fed wires and draft processing away from WesCorp ever since.”
Dale Kerslake's $256 million Cascade Federal Credit Union lost $1.84 million in WesCorp member capital, according to court documents, and when combined with corporate stabilization assessments, the CEO said he estimates losing about $5 million from his balance sheet due to WesCorp losses.
“This group of credit unions, we did not want to do this,” Kerslake said. “We patiently waited for somebody to take responsibility and be held accountable, and that just hasn't happened.”
Kerslake said he e-mailed Siravo in April 2008 expressing concern about losses and asking questions about WesCorp's investment portfolio. Kerslake said Siravo told him losses were due to temporary market dislocation and inappropriate accounting methodology, that he was pleased with the performance of WesCorp's portfolio, and that “in short: all is well.”
“The point is quite simple, WesCorp borrowed $10 billion they didn't need to,” he said. “Did we benefit from a few extra basis points that yielded an extra few thousand dollars? Yes. But did we know they were leveraging themselves out of business? No.”
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